Gold loans has been a hot business with rising price of bullion that allows consumers to borrow against family jewels while providing a cushion for lenders with gold as a collateral. Although lenders face risk of gold prices crashing, given current global economic headwinds, such a scenario looks unlikely.

India has an estimated 18,000 tonnes of gold, amounting to about 10 per cent of the world stock worth over $800 billion. The market potential for gold loans in India is vast as less than 10 per cent of private gold has been monetised.

Besides groups specialising in gold loans such as Muthoot and Manappuram, the business also has a strong presence from certain banks, especially in South India. Incidentally, India’s largest microfinance firm SKS Microfinance has also entered the gold loan business recently.

The gold loans business has also attracted a string of private equity firms including Baring Private Equity India, Matrix Partners, India Equity Partners and Sequoia Capital.

Baring PE India had recently upped its exposure to the sector and has become the largest institutional shareholder in Muthoot Finance with 3.04 per cent stake, followed by other investors like Matrix Partners (2.11 per cent) and UK’s Wellcome Trust (1.34 per cent).

It has also invested in another industry firm Manappuram Finance Ltd, which is backed by a host of other private equity firms like India Equity Partners and Sequoia Capital India.

Magma Strategy:

Magma’s entry into housing finance is an extension of its existing business that revolves around financing of utility vehicles, cars, commercial vehicles, construction equipments, tractors and SME loans. The company has 171 branches in 20 states and one Union Territory, and employs about 5,150 people.

While the entry into new segments will expand the scope of business, entry into housing finance comes at a time when the realty market is not in the best shape. High interest rates and sky high property prices have translated into a slow market. Magma could be hoping to get its feet on the ground before the interest rate cycle improves so that it can grab a piece of the pie.

Magma had earlier said it is looking at entering new areas but did not explain in detail. Early this year when KKR and IFC invested in one of the biggest PE deals in the financial services space in recent times, the company had said the money will be used to support growth plans in existing businesses, in addition to newer areas.

It had said the fresh investment will provide Magma with strategic capital and will enable it to expand its footprint in semi-urban and rural areas, as well as in low-income Indian states of Bihar, West Bengal, Orissa, Chattisgarh, UP and Rajasthan. This could be an interesting strategy as the existing large gold loan firms are still in the process of establishing a bigger foothold in regions outside of South India.

Recently, Sanjay Nayar, country head of KKR in India joined Magma’s board.

Magma Fincorp scrip declined over 2 per cent in mid-day trade on BSE and was quoting at Rs 52 a share, on Thursday in a weak Mumbai market. The shares to KKR and IFC were allotted at Rs 88 per share.

Incidentally, Magma has also signed a joint venture with HDI Gerling, part of the Talanx Group (Germany’s third largest insurance group), to start a general insurance company in India.